The importance of cash flow disclosure and cost of capital |
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Authors: | Richard Anthony Kent Di Bu |
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Affiliation: | 1. Finance, The University of Queensland, Brisbane, QLD, Australia;2. Finance, Bond University, Gold Coast, QLD, Australia |
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Abstract: | We examine whether the choice of cash flow disclosure under International Accounting Standard 7 has an influence on the cost of capital incurred by Australian listed companies. Results indicate that indirect method companies incur a significantly higher ex-ante cost of equity than direct method companies using a combined equity model approach. We also demonstrate that using an optimal weighted combination of equity models reduces model variance and bias compared to using a single equity model. Our findings support mandating the direct method and have the potential to induce companies to report the direct method to increase company value. |
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Keywords: | equity debt cash flow disclosure direct method indirect method |
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